Skip to main content
SpringerLink
Log in
Book cover

Globalization pp 75–101Cite as

Good Times and Bad Times, with Endogenous Trade Policy Responses

  • Chapter
  • First Online:

  • 4474 Accesses

Abstract

Globalisation is associated with long periods of sustained economic growth and credit expansion, whereas major recessions tend to lead to falling trade and protectionism. I investigate this, using a model where an important component of trade is search by firms trying out new trade partners. To model this, I set up a schematic model of upstream-downstream matching between firms, where match quality determines profits. Prior to globalisation, Northern upstream and downstream firms work together, to avoid trade costs. As trade is liberalised, new North-South matches begin to develop, but at first these are footloose (since many are experimental in nature), and can be driven out rapidly if there is a demand crisis.

The presence of a highly elastic, searching element of trade, during periods of global liberalisation and fast growth means that countries cannot gain terms-of-trade advantage from protection. By contrast, if a prolonged recession drives out searching firms, the remaining trade is relatively price-inelastic, and beggar-thy-neighbour tariffs become attractive.

Such observations are consistent with the rapid and damaging switch to protectionism after the 1929 Stock Market Crash, and emphasise the need for continued multilateral commitment to trade liberalisation, in the aftermath of the 2008 Great Trade Recession.

This is a preview of subscription content, log in via an institution.

Chapter
USD   29.95
Price excludes VAT (USA)
  • Available as PDF
  • Read on any device
  • Instant download
  • Own it forever
eBook
USD   119.00
Price excludes VAT (USA)
  • Available as EPUB and PDF
  • Read on any device
  • Instant download
  • Own it forever
Softcover Book
USD   159.00
Price excludes VAT (USA)
  • Compact, lightweight edition
  • Dispatched in 3 to 5 business days
  • Free shipping worldwide - see info
Hardcover Book
USD   159.00
Price excludes VAT (USA)
  • Durable hardcover edition
  • Dispatched in 3 to 5 business days
  • Free shipping worldwide - see info

Tax calculation will be finalised at checkout

Purchases are for personal use only

Learn about institutional subscriptions

Notes

  1. 1.

    Wacziarg and Welch (2008). Dollar and Kraay (2002 and 2003). These studies are not without their critics: for example, Luebker et al. (2002). Winters et al. (2004) give a more overall survey of the benefits of trade liberalisation.

  2. 2.

    E.g. Gros (1987).

  3. 3.

    See Mortensen and Pissarides (1999) for a survey. Papers applying search and matching to trade include Eaton et al. (2007).

  4. 4.

    The paper is a revised version of Edwards (2010).

  5. 5.

    To use Srinivasan and Archana’s (2009) terminology.

  6. 6.

    Melitz (2003).

  7. 7.

    Feenstra and Hanson (1999).

  8. 8.

    Ishii and Yi (1997).

  9. 9.

    Schmitz (1999).

  10. 10.

    Ishii and Yi (1997) use fixed costs of vertical specialization to explain the high observed income elasticities of trade—which they argue cannot plausibly reconciled with more orthodox models.

  11. 11.

    In terms of a macroeconomic model, market search has elements of capital formation, and so it should be no surprise that it has many of the characteristics of investment demand—in terms of cyclical sensitivity.

  12. 12.

    This reflects in part the heterogeneity both of firms (Melitz, 2003) and of trading match quality (Rauch and Casella, 2003).

  13. 13.

    This setup is derived from Salop’s circular cylinder, and is standard in firm-level matching models. Note that Grossman and Helpman’s (2002) model is similar, except that firms know with certainty the location of potential partners, and always match with the nearest.

  14. 14.

    See Hart (1995).

  15. 15.

    The restriction ɛ > 1 is associated with consumers’ assumed ‘love of variety’, and also helps ensure finite pricing by firms.

  16. 16.

    See author for details.

  17. 17.

    Anderson and Winters (2008) provide an excellent discussion of the effects of moving from traditional to more modern CGE models in assessing trade policy.

  18. 18.

    Eaton and Kortum (2002).

  19. 19.

    Eichengreen and O’Rourke (2009) summarise the trade experience of the current economic crisis, with a roughly 20 % fall in World trade (April 2008 to a year later).

References

  • Anderson, J. E., & van Wincoop, E. (2004). Trade costs. Journal of Economic Literature, 42(3), 691–751.

    Article  Google Scholar 

  • Anderson, K., & Winters, L. A. (2008). The Challenge of Reducing International Trade and Migration Barriers. CEPR Discussion Papers 6760, C.E.P.R. Discussion Papers.

    Google Scholar 

  • Balrwin, R., & Evenett, S. (2009). The collapse of global trade, murky protectionism, and the crisis: Recommendations for the G20. CEPR. London: VoxEU.

    Google Scholar 

  • Bernard, A. B., Redding, S. J., & Schott, P. K. (2007). Comparative advantage and heterogeneous firms. Review of Economic Studies, 74(1), 31–66, 01.

    Article  Google Scholar 

  • Besedes, T., & Prusa T. J. (2006). Ins, outs and the duration of trade. Canadian Journal of Economics, 39(1) 266–295.

    Article  Google Scholar 

  • Bhagwati, J. N. (2004). In Defense of globalization. Oxford: Oxford University Press.

    Google Scholar 

  • Brander, J., & Krugman, P. R. (1983). A reciprocal dumping model of international trade. Journal of International Economics, 15, 313–323.

    Article  Google Scholar 

  • Crafts, N. (2004). Globalisation and economic growth: A historical perspective. The World Economy, 27(1), 45–58.

    Article  Google Scholar 

  • Dollar, D., & Kraay, A. (2002). Growth is good for the poor. Journal of Economic Growth, 7, 195–225.

    Article  Google Scholar 

  • Dollar, D., & Kraay, A. (2003). Institutions, trade and growth. Journal of Monetary Economics, 50(1), 133–162.

    Article  Google Scholar 

  • Eaton, J., Eslava, M., Kugler, M., & Tybout, J. (2007). Export Dynamics in Colombia: Firm-Level Evidence. Borradores De Economia 003957, Banco De La Republica.

    Google Scholar 

  • Eaton, J., & Kortum, S. (2002). Technology, geography, and trade. Econometrica, 70(5), 1741–1779.

    Article  Google Scholar 

  • Edwards, T. H. (2010). Globalisation as a ‘Good Times’ phenomenon: A search-based explanation. Economics: The Open-Access, Open-Assessment E-Journal, 4, 2010–2024. http://dx.doi.org/10.5018/economics-ejournal.ja.2010-24

    Google Scholar 

  • Edwards, T. H., & Ferrett, B. (2009). The Search for Trading Partners and the Cross-Border Merger Decision Discussion Paper Series 2009_15, Loughborough University (on REPEC).

    Google Scholar 

  • Eichengreen, B., & O’Rourke, K. H. (2009). A Tale of Two Depressions, commentary on Voxeu.org. http://www.voxeu.org/index.php?q=node/3421.

    Google Scholar 

  • Feenstra, R., & Hanson, G. H. (1999). The impact of outsourcing and high-technology capital on wages: Estimates for the U.S., 1972–1990. Quarterly Journal of Economics, 114(3), 907–940.

    Google Scholar 

  • Gros, D. (1987). A note on the optimal tariff, retaliation and the welfare loss from tariff wars in a framework with intra-industry trade. Journal of International Economics, 23(3–4), 357–567.

    Article  Google Scholar 

  • Grossman, G. M., & Helpman, E. (1992). Innovation and growth in the global economy. Cambridge, MA: MIT Press.

    Google Scholar 

  • Grossman, G. M., & Helpman, E. (2002). Integration versus outsourcing in industry equilibrium. Quarterly Journal of Economics, 117(1), 85–120.

    Article  Google Scholar 

  • Grossman, G. M., & Helpman, E. (2005). Outsourcing in a global economy. Review of Economic Studies, 72(1), 135–159.

    Article  Google Scholar 

  • Hart, O. (1995). Firms, contracts and financial structure. Clarendon lectures in economics. Oxford: Clarendon Press.

    Book  Google Scholar 

  • Ishii, J., & Yi, K-M. (1997). The Growth of World Trade. Research Paper, Federal Reserve Bank of New York.

    Google Scholar 

  • Krugman, P. K. (1979). Increasing returns, monopolistic competition and international trade. Journal of International Economics, 9(4), 469–479.

    Article  Google Scholar 

  • Luebker, M., Smith, G., & Weeks, J. (2002). Growth and the poor: A comment on Dollar and Kraay. Journal of International Development, 14(5), 555–571.

    Article  Google Scholar 

  • Melitz, M. J. (2003). The impact of trade on intra-industry reallocations and aggregate industry productivity. Econometrica, Econometric Society, 71(6), 1695–1725.

    Article  Google Scholar 

  • Mortensen, D. T., & Pissarides, C. A. (1999). New developments in models of search in the labor market. In O. Ashenfelter & D. Card (Eds.), Handbook of labor economics (1th ed., Vol 3, Chap 39, pp. 2567–2627). Amsterdam: Elsevier.

    Google Scholar 

  • Obstfeld, M., & Rogoff, K. (2000). The six major puzzles in international macroeconomics: Is there a common cause? In NBER Macroeconomics Annual, 15 (2000). Cambridge, MA: MIT Press.

    Book  Google Scholar 

  • Rauch, J. E., & Casella, A. (2003). Overcoming informational barriers to international resource allocation: Prices and ties. Economic Journal, 113, 21–42.

    Article  Google Scholar 

  • Rauch, J. E., & Trindade, V. (2003). Information, international substitutability, and globalization. American Economic Review, 93, 775–991.

    Article  Google Scholar 

  • Schmitz, H. (1999). From ascribed trust to earned trust in exporting clusters. Journal of International Economics 48(5), 139–150.

    Article  Google Scholar 

  • Spencer, B. J. (2005). International outsourcing and incomplete contracts’ (presidential address, Canadian Economic Association). Canadian Journal of Economics, 38(4), 1107–1135.

    Article  Google Scholar 

  • Srinivasan, T. N., & Archana, V. (2009). India in the Global and Regional Trade: Determinants of Aggregate and Bilateral Trade Flows and Firms’ Decision to Export. Indian Council For Research on International Economic Relations Working Paper No. 232. ICRIER, Delhi.

    Google Scholar 

  • Trefler, D. (1995). The case of the missing trade and other mysteries. American Economic Review 85(5), 1029–1046.

    Google Scholar 

  • Tybout, J. (2002). Plant- and firm-level evidence on new trade theories. In J. Harrigan (Ed.), Handbook of international economics, Vol 38. Oxford: Basil Blackwell.

    Google Scholar 

  • Van Marrewijk, C. (2007). International economics. Oxford: Oxford University Press.

    Google Scholar 

  • Wacziarg, R., & Welch, K. H. (2008). Trade liberalization and growth: New evidence. World Bank Economic Review, 22(2), 187–231.

    Article  Google Scholar 

  • Winters, L.A., McCulloch, N., & McKay, A. (2004). Trade liberalization and poverty: The evidence so far. Journal of Economic Literature, 42(1), 72–115.

    Article  Google Scholar 

  • Yi, K-M. (2003). Can vertical specialization explain the growth of world trade? Journal of Political Economy, 111(1), 52–102.

    Article  Google Scholar 

Download references

Author information

Authors and Affiliations

  1. School of Business and Economics, Loughborough University, Ashby Road, Loughborough, LE11 3TU, UK

    T. Huw Edwards

Authors
  1. T. Huw Edwards
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to T. Huw Edwards .

Editor information

Editors and Affiliations

  1. Department of Economics and Business Economics, Aarhus University, Aarhus, Denmark

    Bent Jesper Christensen

  2. The Fletcher School, Tufts University, Medford, Massachusetts, USA

    Carsten Kowalczyk

Rights and permissions

Reprints and permissions

Copyright information

© 2017 Springer-Verlag Berlin Heidelberg

About this chapter

Cite this chapter

Edwards, T.H. (2017). Good Times and Bad Times, with Endogenous Trade Policy Responses. In: Christensen, B., Kowalczyk, C. (eds) Globalization. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-662-49502-5_4

Download citation

  • DOI: https://doi.org/10.1007/978-3-662-49502-5_4

  • Published:

  • Publisher Name: Springer, Berlin, Heidelberg

  • Print ISBN: 978-3-662-49500-1

  • Online ISBN: 978-3-662-49502-5

  • eBook Packages: Economics and FinanceEconomics and Finance (R0)

Publish with us

Policies and ethics

Search

Navigation